Economic concerns are casting a shadow on growth prospects

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Engineering & Construction CEOs have a subdued outlook this year. Only 31% are very confident in revenue growth over the next 12 months, fewer than last year. That’s also lower than the overall sample, where 36% are very confident. The difference is more marked looking out over three years, where 46% of the overall sample is very confident. Just 35% of Engineering & Construction CEOs are very confident they’ll be able to increase revenues over three years, only marginally more than expect to grow over the coming 12 months.

That may be because Engineering & Construction CEOs are worried about the long-term economic situation: 88% believe that uncertain or volatile economic growth may threaten their company’s prospects, while 79% are worried about government responses to fiscal deficit and debt burden.

Infrastructure under threat
If government budgets get squeezed, infrastructure projects like building roads and bridges could get the axe. Engineering & Construction CEOs already feel the government isn’t doing enough. Sector CEOs put it #1 on their list of areas they’d like to see the government prioritise. And only around a quarter of them believe that the government is taking adequate steps to improve their country's infrastructure (e.g. electricity, water supply, transport, broadband).

Growing at home shouldn’t mean neglecting opportunities abroad
Engineering & Construction companies tend to be focused on their home countries – indeed, 41% of sector CEOs say that organic growth in their domestic markets is their best chance for growth this year. Only about half as many are looking to grow organically in existing foreign markets, and just 9% expect new operations in foreign markets to drive better results in the coming year.

In our view, that may mean that some smaller construction firms are missing out on possible opportunities. Internationalisation isn’t just for the largest contractors; we think mid-tier firms can also benefit (e.g. from strong growth in Asia). While many of the Engineering & Construction companies we surveyed do already have a presence in East Asia (which includes China, Japan and South Korea), relatively few are operating in South-east Asia or South Asia, where some new economic powerhouses may emerge. They’re under-represented in Latin America, too.

As companies get more global, they’ll need to change the way they develop leaders. 61% of Engineering & Construction CEOs say their companies now encourage global mobility and international experience in order to develop their leadership pipeline. And more than four-fifths of sector CEOs whose companies have such programmes rate them as effective.

The challenge of financing
Wherever projects take place, financing can be an issue. Nearly half of Engineering & Construction CEOs are concerned about their ability to finance growth. And 71% of them say providers of capital influence their business strategies. Many of these CEOs are looking to strengthen their engagement with their creditors and investors – and around a third of them say they'll make major changes to engage better.

CEOs are choosing projects carefully...
Winning a contract and getting financing lined up doesn’t necessarily mean making a profit. In our experience the bidding phase of the process is absolutely critical to successful projects. Sector CEOs already recognise the need to be selective; 70% say their strategy is to focus on a few key projects rather than stretching themselves too thin. That also helps avoid moving into areas where they don't understand the risks involved.

...and filling talent gaps
Engineering & Construction companies are often faced with long lead times, complex projects and intense competition. Once they win a contract, they still need the right people to execute a project on time and on budget. So it’s not surprising that nearly two-thirds of Engineering & Construction CEOs say they’re worried about the availability of key skills, making it one of the top threats to business growth.

Many are doing something about it, though. 37% say that “filling talent gaps” is one of their top 3 investment priorities over the next three years. And more than half of Engineering & Construction CEOs (52%) are planning to increase headcount in the coming year.

They’re improving customer service and expanding service offerings too
46% of Engineering & Construction CEOs say that ‘enhancing customer service’ is a top investment priority for the next 12 months. Great customer service isn't just about the construction phase of a project. Our experience with the sector suggests that innovative Engineering & Construction companies are expanding their pipeline to include every stage of the building process. That includes finding the right location, marketing, building and managing properties, and renovating older facilities – all the way through to eventual demolition. That’s helping to make some businesses more resilient during tough economic times.

R&D and innovation isn't getting much attention
One area where fewer Engineering & Construction CEOs are investing, compared to the overall sample, is in R&D and innovation. Just 17% of them say it's a top priority, compared with 32% overall. Historically Engineering & Construction companies have under-invested in this area. In our view the survey data suggests that many may be continuing to overlook the fact that innovation could provide them with real competitive advantage. That's critical in an environment where margins are likely to remain low and the market competitive.

CEO interview quotes

"The most important stakeholder is the customer. If there is no customer we have no business."

"It is not about simply doing exactly what a contract says: we go way beyond that. We say ’Remember that this client is hiring someone to solve a specific problem and that problem won’t be exactly detailed in the contract.’ Issues arise ... so we have to … work out ways to solve problems that aren’t in the contract."

"In terms of revenue growth, our key area of focus is to maintain a satisfied and happy client base. We’re committed to offering quality developments irrespective of location or price point. We pay great attention to our relationships with our commercial lessees. We focus on quality maintenance and new service offerings."

"The investment required in infrastructure is the backbone of economic growth. The government keeps saying we want to invest $1 trillion over five years, but I don’t think even half of that is happening at this point. So that needs to be revised and we also need to fill the project pipeline."

"We truly believe that the more thinking that goes into a project before you actually start the construction, the cheaper it is for everybody. That premise means we are planning better and we are using much better engineers to study the concept of the project before the equipment and the people arrive at the site."

"I consider ICA to be one of the companies that has the most impact on society. This is because of what we do and the numbers of people we employ to get things going; our clear focus on improving technical capabilities and promoting engineering; and also because of the way we try to work closely and proactively with the government."